Appling Enterprises issued 10% bonds with a face amount of $540,000 on January 1
ID: 2525921 • Letter: A
Question
Appling Enterprises issued 10% bonds with a face amount of $540,000 on January 1, 2018. The bonds sold for $496,675 and mature in 2037 (20 years). For bonds of similar risk and maturity the market yield was 11%. Interest is paid semiannually on June 30 and December 31. Appling determines interest expense at the effective rate. Appling elected the option to report these bonds at their fair value. The fair values of the bonds at the end of each quarter during 2018 as determined by their market values in the over-the-counter market were the following:
General (risk-free) interest rates did not change during 2018.
Required:
1. By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the March 31 quarterly financial statements?
2. By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?
3. By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterlyfinancial statements?
4.By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the December 31 annualfinancial statements?
(For all requirements, Do not round your intermediate calculations.)
Explanation / Answer
Workings:
Semi-annual periods
(A): Interest plus redemption value
(B): PV factor@ 5.5% pa
Present value (A x B)
1
27000
0.947867
25592.42
2
27000
0.898452
24258.22
3
27000
0.851614
22993.57
4
27000
0.807217
21794.85
5
27000
0.765134
20658.63
6
27000
0.725246
19581.64
7
27000
0.687437
18560.79
8
27000
0.651599
17593.17
9
27000
0.617629
16675.99
10
27000
0.585431
15806.63
11
27000
0.554911
14982.58
12
27000
0.525982
14201.5
13
27000
0.498561
13461.14
14
27000
0.472569
12759.37
15
27000
0.447933
12094.19
16
27000
0.424581
11463.69
17
27000
0.402447
10866.06
18
27000
0.381466
10299.58
19
27000
0.361579
9762.635
20
567000
0.342729
194327.3
Present value as on January 01, 2018
507734
Less: Present value of interest from January 01, to 31st March, 2018
Interest for 3 months (540000 x 10%) x 3/12
13500
Present value multiplication factor
0.947867
Present value of interest (13500 x 0.947867)
12796.21
Present value of bond as on 31st March, 2018
494937.8
Part 1:
Particulars
Amount ($)
Fair value of bond on March 31
530000
Less: Present value of bond as on 31st March, 2018
507734
Appling's comprehensive income will be increased by (530000 - 507734)
22266.03
Part 2:
Present value as on January 01, 2018
507734
Less: Present value of interest from January 01, to 30th June, 2018
Interest for 6 months (540000 x 10%) x 6/12
27000
Present value multiplication factor
0.947867
Present value of interest (27000 x 0.947867)
25592.42
Present value of bond as on 30th June, 2018
482141.6
Particulars
Amount ($)
Fair value of bond on 30th June
510000
Less: Present value of bond as on 30th June, 2018
482141.6
Appling's comprehensive income will be increased by (510000 - 482141.60)
27858.45
Part 3:
Present value as on January 01, 2018
507734
Less: Present value of interest from January 01, to 30th September, 2018
Interest for 9 months (540000 x 10%) x 9/12
40500
Present value multiplication factor
0.898452
Present value of interest (40500 x 0.898452)
36387.32
Present value of bond as on 30th September, 2018
471346.6
Particulars
Amount ($)
Fair value of bond on September 30, 2018
501000.00
Less: Present value of bond as on 30th September, 2018
471346.6
Appling's comprehensive income will be increased by (501000 - 471346.60)
29653.36
Part 4:
Present value as on January 01, 2018
507734
Less: Present value of interest from January 01, to 31st December, 2018
Interest for 12 months (540000 x 10%)
54000
Present value multiplication factor
0.898452
Present value of interest (54000 x 0.898452)
48516.43
Present value of bond as on 31st December, 2018
459217.5
Particulars
Amount ($)
Hair value of bond on March 31
508000
Less: Present value of bond as on 30th June, 2018
459217.5
Appling's comprehensive income will be increased by (508000 - 459217.50)
48782.46
Semi-annual periods
(A): Interest plus redemption value
(B): PV factor@ 5.5% pa
Present value (A x B)
1
27000
0.947867
25592.42
2
27000
0.898452
24258.22
3
27000
0.851614
22993.57
4
27000
0.807217
21794.85
5
27000
0.765134
20658.63
6
27000
0.725246
19581.64
7
27000
0.687437
18560.79
8
27000
0.651599
17593.17
9
27000
0.617629
16675.99
10
27000
0.585431
15806.63
11
27000
0.554911
14982.58
12
27000
0.525982
14201.5
13
27000
0.498561
13461.14
14
27000
0.472569
12759.37
15
27000
0.447933
12094.19
16
27000
0.424581
11463.69
17
27000
0.402447
10866.06
18
27000
0.381466
10299.58
19
27000
0.361579
9762.635
20
567000
0.342729
194327.3
Present value as on January 01, 2018
507734
Less: Present value of interest from January 01, to 31st March, 2018
Interest for 3 months (540000 x 10%) x 3/12
13500
Present value multiplication factor
0.947867
Present value of interest (13500 x 0.947867)
12796.21
Present value of bond as on 31st March, 2018
494937.8
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